Capital Product Partners L.P.

Thank you for standing by, and welcome to the Capital Product Partners Second Quarter 2021 Financial Results Conference Call. We have with us Mr. Jerry Kallouratos, Chief Executive Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone I must advise you that this conference is being recorded today. The statements in today's conference call that are not historical facts, including our expectations regarding cash generation, equity returns, and future debt levels, our ability to pursue growth opportunities, our expectations or objectives regarding future distribution amounts, capital reserve amounts, distribution coverage, future earnings, capital allocations, as well as our expectation regarding market fundamentals and the employment of our vessels, including re-delivery dates and charter rates, may be forward-looking statements, as such as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that could cause the stated or forecasted results to be materially different from those anticipated. Unless required by law, we expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations to conform to actual results or otherwise. We assume the responsibility for the accuracy and completeness of the forward-looking statements. We make no predictions or statements about the performance of our common units. I would now like to hand you over to your speaker today. Mr. Kalogiratos, please go ahead, sir.

Thank you, Valerie, and thank you all for joining us today. As a reminder, we will be referring to the supporting slides available on our website as we go through today's presentation. The partnership's net income for the second quarter of 2021 was $35.4 million, or $10 million, excluding a gain of $25.4 million from the sale of the CMA CGM Madalena in May 2021, compared with a net income of $8.7 million for the second quarter of 2020. Our Board of Directors has declared a cash distribution of $0.10 per common unit for the second quarter of 2021. The second quarter cash distribution will be paid on August 10th to common unit holders of record on August 3rd. The partnerships operating surplus for the second quarter was 23.5 million or 15.2 million after the quarterly allocation to the capital reserve. In addition, and as stated, we concluded on May 17th the sale of the CMA-CGM Madalena. Since the launching of the unit repurchase plan on February 19th, And as of June 30th, we repurchased approximately 331,200 common units at an average cost of $1,165 per unit. Finally, the partnership's charter coverage for 2021 and for 2022 stands at 92% and 85% respectively, while the remaining charter duration corresponds to 3.9 years. Turning to slide three. Revenues for the quarter were 39.8 million compared to 36.6 million during the second quarter of 2020. The increase in revenue was primarily attributable to the increase in the size of our fleet following the acquisition of three Panamax containers in February 2021 and the decrease in the net amortization of time charters acquired together with certain of our vessels. The increase was partly set off by the decrease in the average daily charter rate earned by the vessels in our fleet and the sale of the CMA CGM Madalena in May 2021. Total expense for the quarter were 25.6 million compared to 22.7 million in the second quarter of 2020. Voyage expense for the quarter increased to 2.2 million compared to 1.3 million in the second quarter of 2020, as currently our sole dry-bulk vessel, the Cape Agamemnon, trades in the dry-bulk spot market. Total vessel operating expenses during the second quarter of 2021 amounted to 11.7 million compared to 9 million during the second quarter of 2020. The increase in vessel operating expenses was mainly due to the increase in the size of our fleet following the acquisition of the three vessels in February 2021. Total expenses for the second quarter of 2021 also included vessel depreciation and amortization of 10.1 million compared to 10.5 million in the second quarter of last year. The decrease in depreciation and amortization during the second quarter of 2021 was mainly attributable to the classification of the vessels CMA-CGM Adelena and Adonis as vessels held for sale, partly offset by the increase reflecting the acquisition of the three Panamax container vessels in February 2021. Upon the delivery of the CMA-CGM Adelena to its new owners, In May, we recognized a gain from sale of 25.4 million, representing the difference of the net proceeds we received from the sale and the vessel's net book value upon delivery. General administrative expenses for the second quarter of 2021 amounted to 1.7 million as compared to 1.8 million in the second quarter of last year. Interest expense and finance costs decreased by 1 million due to the decrease in the LIBOR-weighted average interest rate, compared to the second quarter of 2020, and the decrease in the average long-term debt outstanding during the period. The partnership recorded net income of $35.4 million for the second quarter, compared with net income of $8.7 million for the second quarter of 2020. On slide 4, you can see the details of our operating surplus calculations that determine the distributions to our unit holders compared to the previous quarter. Operating surplus is a non-GAAP financial measure, which is defined fully in our press release. We have generated approximately 23.5 million in cash from operations for the quarter before accounting for the capital reserve. We allocated 8.3 million to the capital reserve, a decrease of 1.8 million compared to the previous quarter, resulting from a decrease in our scheduled quarterly debt principal payments due to the sale of the CMA, CG and Maddalena earlier this year. After adjusting for the capital reserve, the adjusted operating surplus amounted to 15.2 million. On slide 5, you can see the details of our balance sheet. As of the end of the second quarter, the partners' capital amounted to 461.7 million, an increase of 39.6 million compared to 422.1 million as year-end 2020. The increase reflects Debt income for the six months ended June 30th, and the amortization associated with the equity incentive plan, partly offset by distributions declared and paid during the period in the total amount of 3.8 million, and the repurchase of partnerships common units for an aggregate amount of 3.9 million. Total debt decreased by 32.1 million to 347.6 million, compared to 379.7 million as of year end 2020. The decrease attributable to the sale of the Maddalena and their respective debt repayment and their respective financing arrangement in a total amount of 49.6 million and to schedule principal payments during the period, partly offset by the 30 million sale and leaseback transaction and the seller's discredit agreement in the amount of 6 million in connection with the acquisition of the three Panamax container vessels in February 2021. Total cash as of the end of the quarter amounted to 112.2 million including restricted cash of 8 million. Turning to slide 6, the partnership has concluded the sale of CMA-CGM-Mandalena, and the vessel was delivered to its new owners on May 17th. The transaction generated gross proceeds of approximately 49.4 million after repaying outstanding debt. Although the vessel was recognized in the partnership's books at an acquisition cost of $88.5 million, the cash consideration paid for the acquisition of the vessel in 2016 was $81.5 million, where the difference represented the value allocated at the time to the specific vessel for resetting the partnership's IDRs, incentive distribution rights, that is, adjusted by the value of the above-market acquired charter. We now expect the sale of the sister ship Adonis to be concluded in November 2021 after the vessel completes its current time charter employment or potentially earlier if we come to an agreement with current charters and the buyer for the innovation of the charter party. We expect the sale to result in gross proceeds of approximately 49.4 million after repaying outstanding debt. Moving to slide 7, following the sale of the Maddalena, the partnership's charter coverage for 2021 and 2022 corresponds to 92% and 85% respectively, while the remaining charter duration amounts to 3.9 years. Looking ahead, all our container vessels are under long-term charters. The earliest charter expiry is our remaining 9,000-EU vessel, Akadimos, in March 2022. Charters have a six-month option until September 2022, declarable in early February 2022, in which case the day rate will increase from $31,500 to $35,000 per day. The Cape Agamemnon continues to trade in the spot market, having earned approximately $26,000 per day for the second quarter of 2021. As previously discussed, we believe that the opportunistic strategy we have followed for this vessel has paid off, as we have seen a material improvement, both in terms of the underlying charter market, as well as the value of the vessel. The Cape Agamemnon is now expected to open up again in mid-August for new business, with current market being estimated in the mid to low 30,000 for an Australia to China round. We will continue to monitor the dry bulk market closely as the recent increase in asset prices makes the opportunistic divestment of this asset more attractive. On slide 8, we review the container market. The second quarter of 2021 saw further increases to charter aids and longer periods being fixed for all sizes. Currently, charter aids in all segments are at an all-time high. And the standard 8,500 TU container has gone from fixing around $17,000 in the second quarter of 2020 to over $40,000 for a five-year period in the first quarter of 2021 to presently low $60,000. That is, of course, if there are any prompt ships available. The driving force for the very strong improvement in the container market is the increase in container demand due to unprecedented fiscal stimulus measures pent up demand, as well as changing consumer spending patterns. Overall demand growth for full year 2021 is expected at 6.6%. At the same time, the supply side remains very much disrupted due to shortage of equipment, port congestion globally, and general COVID-19 related problems all around the world. Supply growth for 2021 is estimated at 4.5%. As a result of the extremely high rates, the container order book has increased to 20% of the total fleet capacity. Importantly, if all options and letters of intent out there are exercised, the actual order book could be well higher. This needs to be compared against an order book of just short of 11% at the beginning of the fourth quarter of 2020. 2023 and beyond seems especially heavy on deliveries, with presently 3.5 million TU scheduled for delivery. As of quarter-end, slippage in TU terms of new building container vessels amounted 22%, including cancellations, whereas demolition year-to-date stands at only 13 units of 10,000 TU capacity versus 79 units of 190,000 TU capacity last year. Due to the increased vessel ordering, new building prices have increased rapidly, with most yards now being fully booked beyond 2023, especially for larger container vessels. The fall of the U.S. dollar, the increase in steel prices, and inflationary pressures on equipment costs have also resulted in upwards pressure on prices. While we believe that the container charter market has legs in the short to medium term, on the back of strong momentum and supply-demand dynamics, we remain cautious on the long-term prospects of the container market. The longevity of the container freight and charter bull market is closely intertwined with the developments of the COVID-19 front including the rollout pace of vaccines, virus mutations, and their impact on quarantine measures globally, and other demand and supply drivers, such as the change in consumer behavior and supply chain disruptions. An easing of the logistics chain disruption going forward, combined with a more balanced spending pattern between manufactured product and services, could have an adverse effect on demand for container vessels that could lead to a weaker market. This could be further exacerbated if it coincides with increased vessel deliveries from the back of the now inflated order book. Turning to slide nine, as we have discussed in the previous earnings call, the partnership has access to a number of assets with employment in place that could be potential drop-down candidates, including six XDF LNG carriers and three eco-container vessels. Out of the six LNG carriers, three are in the water and other three will be delivered by the end of the third quarter this year. All of them have medium to long charters in place to investment-grade counterparties. In our view, an investment in LNG carriers would allow us to deploy equity in vessels that are currently in the water with an immediate return and would come at the moment in time that the LNG charter market and its fundamentals are at an inflection point. Apart from the LNGCs, the partnership will be considering the acquisition of three latest ecotype 13,000 TU container vessels currently under construction at Hyundai Shipyard in South Korea, and due for delivery from November 2022 to May 2023. As previously communicated, the three vessels have secured employment with Hapag-Lloyd for a maximum period of 14 years, including options. Moving to slide 10, I would like to conclude by reiterating the strategy of the partnership going forward. We believe that by releasing the equity locked into the two vessels we sold and the increased liquidity from internally generated cash flows, we'll have a unique opportunity to achieve a number of objectives for the partnership at a larger scale while we continue to return capital to our unit holders. Firstly, continue to grow the partnership's fleet with the aim of concluding first and foremost accretive transactions to our earnings and distributable cash flow. At the same time, we will seek to reduce the partnership's fleet average age as well as its environmental footprint. With regard to the latter, we expect ESG considerations, and especially the environmental footprint of the industry, to come under increased scrutiny in the future. The inclusion of vessels' emissions in the EU carbon trading scheme or other forms of taxing emissions, in addition to the increasingly heavier IMO regulatory framework when it comes to emissions, are expected to increasingly penalize older and less efficient vessels. Hence, we aim to focus going forward on modern vessels, take into account their emissions profile, as well as their contribution towards reducing the partnership's footprint. For example, the LNG carriers we discussed earlier, which use natural gas for their propulsion, reduce CO2 emissions by almost 30% compared to fuel oil propulsion, and deliver 100% reduction in CO2 sulfur oxides, and 85 percent in nitrous oxide emissions, while particulate matter emissions fall by 95 to 100 percent. We have also estimated that the new building 13,000 EU container vessels, assuming the same trading speed with the two 9,000 EU vessels we sold, are expected to save 30,000 tons per year of CO2 due to their innovative design, fuel-efficient engines, and a series of energy-saving devices and improvement. Again, assuming a price of $50 per ton for CO2 emissions, that would imply a monetary benefit of $1.5 million per vessel per year, or $4,000 per day. Finally, and with the above in mind, to the extent we can take advantage of increased asset prices, we will continue to look for divestment opportunities for older tonnage. We are fortunate to have access in this endeavor to a substantial asset pipeline with medium to long-term chapters in place, as described earlier, amounting to approximately 1.5 billion in value, with an estimated annual EBITDA of approximately 155 million. Our preliminary estimates show that the acquisition of any combination of these assets would be highly accretive to our earnings, will enhance the sustainability of our common unit distribution, and create the basis for increasing the distribution in the future, while materially improving the average age of our fleet, as well as the environmental footprint of the partnership. In addition, the medium to long-term charters of these vessels will ensure long-term cash flow visibility beyond 2024 and 2025, when most of our existing charters expire and certain of our vessels approach their 20th anniversary. As we think about these potential acquisitions, it is important to note that we are going to prioritize internally generated cash flows and taking over the existing debt in place, as well as explore avenues of raising additional capital. We are making progress on the above considerations as we are in advanced discussions with the Partnerships Board, and I hope that we will be able shortly to communicate to the market our plans in this regard. And with that, I'm happy to answer any questions you may have.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad and wait for the automated message advising your line is open. Please state your full name and company name before you ask your question. If you wish to cancel your request, please press star 2. Once again, please press star 1 if you wish to ask a question. We will not take our first question. Please go ahead. Your line is open.